Private equity appetite for the life sciences sector

Regina Gabitova

Private equity firms are finding more creative ways to increase their investment in the life sciences sector. 

Pharmaceutical researcher_private equity_life sciences sectorThe life sciences sector is a highly complex one comprising (often) subjective subsectors; Pharma including biotech, Pharma Services including med-comms and contract organisations and Medtech including medical devices and healthcare IT. Care services is excluded from this classification.

When investing in a company, including life science companies, private equity firms typically follow a 5-year investment plan; they acquire a stake, either minority or majority, in the company and an accompanying ‘significant level of control’ of company operations.

After 5 years, the private equity (PE) firm aims to sell its share of the company; either through an IPO of the portfolio company or by selling to a strategic buyer or to another PE firm. PE firms have traditionally invested in more mature assets or companies, for example hospitals, that produce steady cash flows to pay off debt used for acquisition financing. Start-up biotech and healthcare technology companies, which often carry a higher risk and are unprofitable, are often targeted by venture capital funds.

The complexity of the life sciences sector is further augmented by the increased outsourcing of processes, a greater emphasis on safety and regulation, technology being increasingly integrated into healthcare, and a need to analyse and manage patient data in a GDPR compliant manner. However, as a sector that is highly fragmented, operationally inefficient and filled with unmet patient needs, particularly as populations live with chronic age and lifestyle related diseases, PE firms are exploiting the need for changes in the life sciences sector, increasing the number of acquisitions they’ve undertaken over the years (Figure 1).  To make these early-stage investments viable, private equity firms are adopting more creative strategies, which will be explored here within the Pharma and Pharma Services subsectors.



The pharma (or biopharma) subsector, encompassing companies specialising in the discovery and development of drugs, is subject to stringent safety and manufacturing regulations. It is highly risk-exposed; 90% of clinical trials fail, and highly capital intensive, leaving venture capital and capital markets historically to invest in it.

Investment in the pharma subsector does however follow a general pattern; seed round investment, followed by rounds of venture-capital funding, followed by the pharma company’s acquisition by another pharma company. This importantly allows PE to bridge the gap between venture capital funding and an IPO, preventing expensive, late-stage development from stalling.   But surely the discrepancy between the relatively short-term investment period of PE and the notoriously long drug development timelines within pharma, would suggest a hesitancy by PE firms to invest? Not quite. Pharma has generally proven to be recession-recalcitrant and offers substantial returns, if PE firms are flexible, contributing to the surge in deal value and volume between 2017 and 2018 from $42.6bn to $63.1bn and from 265 to 316 respectively.

One tactic is to delist public biopharma companies, often with successful late-stage data but struggling to continue operationally. For example, Waypoint Capital acquired the entire issued and to-be-issued ordinary shares of UK-based, publicly listed Stallergenes Greer for €37 cash per share, a 42.9% premium on their closing share price, in a deal valued at €730m. By taking Stallergenes Greer private in May 2018, the immunotherapy company was able to return to profit in 2018 whilst continuing the development of its allergy medication pipeline due to Waypoint’s cash injection and healthcare expertise.

Alternatively, PE firms can invest in more traditional family-controlled companies wishing to expand, exemplified by the acquisition of the large Italian pharma company Recordati for $7.4bn by a consortium consisting of CVC Capital Partners, PSP Investments and the StepStone Group; the second largest healthcare deal of 2018. This allowed Recordati to keep a portion of the company as publicly traded, as only 51.8% of Recordati was acquired by the consortium, and to retain Andrea Recordati as CEO to continue operations, whilst receiving capital from PE investors to expand their lucrative rare diseases business. The ‘club deal’ structure enabled all three PE firms to expand their portfolios and to dilute the risk associated with such a high-value buy-out.


Generic giants such as Teva and Mylan generate revenues of $19bn and $4bn respectively, forcing many large biopharma companies to carve-out low-growth, mature, generic drug portfolios in order to invest more time and money on new, innovative R&D. PE firms can then be enlisted to acquire these ‘non-core’ assets. In October 2018, Sanofi divested its European generics business Zentiva to Advent International for €1.9bn, with the aim of streamlining its operations, especially as Zentiva’s revenues dropped by 5% from 2016 to 2017. Most recently, CG Results Healthcare advised PE firm Duke Street on its acquisition of Kent Pharmaceuticals, a generics company specialising in the manufacture of antibiotics, and Athlone Laboratories, the associated Irish manufacturer, in a deal announced in June 2019. Kent Pharmaceuticals was acquired by DCC Vital in 2013 for £58m and was performing well, initially generating earnings of £73.3m, EBITDA of £8.7m and providing greater access for DCC to the British market. However, revenue between 2016 to 2018 declined, providing an opportunity for Duke Street to acquire Kent Pharmaceuticals and outlay capital for Kent’s planned expansion into new generic markets across the EMEA region.

>>>> Read: Private equity: changing attitudes to European healthcare

Contract organisations

Contract Research Organisations (CROs) enable the outsourcing of time-consuming, expensive clinical trials and drug discovery programs to CROs whilst complex, equipment-intensive and highly specific manufacturing protocols can be outsourced to Contract Development and Manufacturing Organisations (CDMOs) enabling pharma companies to concentrate their efforts on R&D.

PE firms have most definitely recognised the value this subsector provides, making billion-dollar acquisitions of CROs that have drastically shaped and consolidated the CRO landscape; the top CROs by revenue (IQVIA, LabCorp (Covance), PPD, Parexel, ICON, PRA Health Sciences, Syneos, Charles River, Wuxi AppTec) control >60% of the market.

Pamplona Capital Management’s acquisition of Parexel in 2017 in a deal valued at $5bn, including Parexel’s net debt cements PE’s crucial role here. It allows Pamplona to leverage the strategic relationships Parexel has within the CRO space to potentially undertake smaller bolt-on acquisitions to existing healthcare companies within its extensive portfolio. Parexel’s performance was lagging due to cancelled contracts, enabling Pamplona to finance $290m of the deal with debt by setting up a credit line using Parexel’s customer’s unpaid bills, to reduce the amount of equity risked in the buyout. By using debt-financing, Pamplona was able to pay a 27.9% premium on Parexel’s stock price at $88.10 per share in cash.

In contrast, the CDMO landscape is highly fragmented, with major players holding just 2-4% of the market share, primarily due to many CDMOs being privately held or part of PE fund portfolios. Therapeutic areas such as gene therapy, vaccines and oncology are now generating approved products, facilitating the need for CDMOs with specialised technologies, for example with innovative containment solutions. PE houses are exploiting this, undertaking an increasing number of these niche investments with buy-and-build potential, particularly in 2019 (Figure 2). Ampersand Capital, a healthcare specific investor, acquired Vibalogics GmbH in May 2019 for an undisclosed amount, exploiting the increasing need for viral therapeutics. Vibalogics, a CDMO focused on the development of oncolytic viral therapies, gene therapies, and vaccines, have already introduced new bioreactors to expand their manufacturing line using Ampersand’s investment.

Innovations to investing in life sciences

PE companies face several barriers when investing in life science companies; primarily financing high-value transactions, a consequence of the increased competition between financial sponsors and corporate acquirers for high-value deals, which can be overcome through debt financing and club deals (see above).

The life sciences sector is highly technical, making the identification of valuable assets difficult. Consequently, many PE firms have launched life science-specific investment vehicles, for multiple reasons. Firstly, to have capital readily available for investment and secondly, to have a team with deep sector-specific expertise tracking the life sciences landscape and thirdly, to keep up with the ever-changing regulatory reforms within different countries. PE firms can therefore take a dynamic and active role in the growth of their life science portfolio companies.

Blackstone exemplifies this; following their acquisition of Clarus Life Sciences, a global life-sciences investment firm focused on funding growth-stage investments, in 2018 (for an undisclosed sum), they established Blackstone Life Sciences to facilitate the continued development and commercialisation of novel drugs within underfunded biopharma programs.

Strategic partnerships between life science and PE companies enables free-standing joint ventures to be launched. Bain Capital and Pfizer did exactly this, spinning-out Cerevel Therapeutics in 2018, a niche biopharma company focusing on the development of drug candidates to treat central nervous system (CNS) disorders, a popular therapeutic area for drug discovery due to the unmet patient need. Whilst Pfizer contributed a portfolio of pre-commercial neuroscience assets including three clinical stage and pre-clinical stage compounds intended to target CNS disorders, Bain Capital contributed $350m of capital for development of these compounds.

Clearly, PE’s investment in life sciences is crucial in enabling life-saving treatments to reach patients. The great potential for PE firms to make lucrative returns later means that PE’s appetite for life sciences, particularly in the CDMO and generics space is likely to increase; a win-win scenario. However, for PE firms to continue shaping the life sciences landscape, it’s imperative that they develop sector-specific knowledge and devise innovative strategies for overcoming the many barriers.